Markets
Yesterday, global core bond trading developed in tight ranges for most of the day as investors awaited the outcome of the meeting between US President Trump & EU’s Juncker. A 5-year US Treasury auction attracted strong investor interest. However, yields jumped higher later as the EU and the US agreed to start negotiations to reduce tariff and non-tariff trade barriers between the two economies. At the end of the day, US yields rose between 3.6bp (2-y) and 2.6 bp (10-y). Changes on the German yield curve were limited as trading finished before the EU-US trade agreement. Today, the US eco calendar contains jobless claims, inventory data and the durable goods orders. The US Treasury will sell $30bln of 7-year Notes. In Europe, the focus will be on the press conference after the ECB policy meeting. We expect President Draghi to maintain the guidance that the bank gave on interest rates at the June meeting. He probably won’t be more specific on the ‘through the Summer’ wording. This morning, Bunds will probably open lower, joining the late session setback in the US yesterday evening. For now, the rise in US yields has stalled. Sentiment on risk became more cautious as poor results from Facebook after the close yesterday are weighing on Tech stocks. Even so, we expect US bond markets to focus on the data ahead of tomorrow’s US Q2 GDP data. Today’s US data probably won’t question expectations for a strong Q2 growth figure. So, we see bond yields holding this week’s rise. A strong US growth figure might help US 10-y yields to return to the 3% mark. We also don’t expect Draghi’s comments to provide additional support for Bunds.
Yesterday, the major USD cross rates traded in wait-and-see modus ahead of the outcome of the Trump-Juncker meeting. EUR/USD reversed a modest intraday loss as an escalation in the trade war was avoided. However, a break beyond first intermediate resistance at 1.1750/90 was blocked. USD/JPY hardly profited from higher US yields and a constructive risk sentiment. Yen strength prevailed ahead of next week’s BOJ meeting. The positive turn in the US-EU trade talks might be slightly euro supportive this morning. However, assuming that Draghi will confirm the ECB’s ‘lower for longer stance’ on policy rates and with markets preparing for strong US Q2 growth tomorrow, we expect the EUR/USD 1.1850 range top to hold. The picture of USD/JPY looks fragile. A mixed risk sentiment and ongoing speculation on next week’s BOJ policy meeting will probably protect the downside for the yen.
Yesterday, EUR/GBP mostly hovered in a very tight range, mostly slightly below 0.89. CBI retail data were OK but failed to inspire further sterling gains. Today, UK eco calendar is empty. More technical trading might be on the cards for sterling. We consider the reaction of sterling to May’s political move earlier this week as slightly disappointing from a sterling point of view.
News Headlines
Trump and Juncker have ceased fire in the US-EU trade war. They will start negotiations to reduce transatlantic tariffs and other trade barriers related to all industrial goods, other than cars. The EU, in return, committed to start buying more soybeans and liquefied natural gas. Tariffs on steel- and aluminum, however, stay in place.
Two Saudi Arabia large crude carrier ships were attacked by Yemen’s Iran-aligned Houthi movement. Saudi Arabia’s energy minister Khalid al-Falih said in a statement that the country is temporarily suspending all oil shipments through that strategic shipping lane in the Red Sea. Oil prices climbed for a third day in a row.
Canadian and Mexican officials met yesterday to discuss further negotiations on NAFTA. Both countries were optimistic on a positive outcome and expressed that a trilateral agreement remains the priority, despite that US Agriculture Secretary Perdue raised the prospect that NAFTA could be negotiated separately.
